Equities gain as investors await US inflation numbers
Gold and oil get a boost from a weaker dollar in the run-up to a string of central bank meetings
12 December 2023 - 12:49
byAmanda Cooper
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London — Global stocks rose on Tuesday, oil and gold edged higher, and the dollar weakened before the announcement of US inflation figures that could set the tone for trading in a week filled with central bank meetings.
The Federal Reserve is widely expected to keep rates steady on Wednesday, with the spotlight firmly on comments from chair Jerome Powell during his news conference, as well as the central bank’s economic projections.
Before that, the US Labor Department’s Consumer Price Index (CPI) report is expected to show inflation still cooling, though still remaining well above the Fed’s 2% annual target. Core CPI is forecast at 4%.
Equities have rattled higher, while bond yields have fallen in recent weeks on growing investor conviction that interest rates are about to fall quite swiftly, as the US economy in particular coasts towards a soft landing.
“The market, in my view, now wants to enjoy a bit of a rally on the back of increasing Fed rate-cut expectations. The problem I have now is I think we’ve basically reached the limit of how much the Fed can cut; that is, what’s priced into the curve without introducing a significant recession risk,” said Kallum Pickering, senior economist at Berenberg.
Caution among investors has tempered volatility. Headline inflation has cooled more quickly than many expected, including consumers, who, a year ago predicted price pressures would be running at a rate of 4.2% at this point compared 3.2% right now, based on the University of Michigan's monthly one-year inflation expectations index.
But other components of the CPI report have proven far stickier. One such gauge, the owners’ equivalent rent — which measures the change in the cost of shelter for homeowners — is at 6.8%, having peaked only in April this year at 8.2%, compared with the peak in the headline at 9.1% in April 2022. Wage growth has slowed, but is still at 4%.
The MSCI All-World index, which is trading around four-month highs, was 0.16% higher. In Europe, the Stoxx 600 held firm while US index futures rose 0.1%-0.2%.
Markets are now pricing in a 48% chance of a rate cut in March compared with 57% a week earlier, according to the CME FedWatch tool. Futures show traders expect at least four quarter-point cuts next year.
Fast and loose
Financial conditions have eased since the Fed met in November and that will most probably influence the central bank’s thinking, analysts said.
“The Fed will feel that it cannot afford to have financial conditions ease further, as that could potentially re-accelerate labour demand and put renewed upward pressure on the rate of consumer inflation,” said Erik Weisman, chief economist and portfolio manager at MFS Investment Management. “Whether the market takes the hint remains to be seen and it is more likely to be driven by the unfolding macro data than Fed jawboning.”
In a busy week for central banks, the European Central Bank, the Bank of England, Norges Bank and the Swiss National Bank all meet on Thursday.
The yield on 10-year treasury notes fell 4.6 basis points to 4.192% after lacklustre three- and 10-year note auctions on Monday.
Investors were reluctant to buy Treasuries at the auctions given thinner liquidity with the inflation data and the Fed meeting due.
The treasury department will sell $21b in 30-year reopened bonds on Tuesday, after Monday’s auction of $50bn in reopened three-year notes and $37b in 10-year notes.
In currency markets, the yen recovered some of the previous day’s losses, which were triggered by a Bloomberg report that cited sources as saying Bank of Japan officials saw little need to exit their negative-rates policy straight away. The yen surged against the dollar last week, driven by brief optimism that a shift could come as early as this month.
The yen strengthened 0.46% to ¥145.51/$r, recouping some of Monday’s 0.8% decline. The central bank meets next week.
The dollar index, which measures the greenback against six others, fell 0.21% to 103.84.
Gold edged higher after touching a three-week low in the previous session and was last 0.2% firmer at $1,985 an ounce.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Equities gain as investors await US inflation numbers
Gold and oil get a boost from a weaker dollar in the run-up to a string of central bank meetings
London — Global stocks rose on Tuesday, oil and gold edged higher, and the dollar weakened before the announcement of US inflation figures that could set the tone for trading in a week filled with central bank meetings.
The Federal Reserve is widely expected to keep rates steady on Wednesday, with the spotlight firmly on comments from chair Jerome Powell during his news conference, as well as the central bank’s economic projections.
Before that, the US Labor Department’s Consumer Price Index (CPI) report is expected to show inflation still cooling, though still remaining well above the Fed’s 2% annual target. Core CPI is forecast at 4%.
Equities have rattled higher, while bond yields have fallen in recent weeks on growing investor conviction that interest rates are about to fall quite swiftly, as the US economy in particular coasts towards a soft landing.
“The market, in my view, now wants to enjoy a bit of a rally on the back of increasing Fed rate-cut expectations. The problem I have now is I think we’ve basically reached the limit of how much the Fed can cut; that is, what’s priced into the curve without introducing a significant recession risk,” said Kallum Pickering, senior economist at Berenberg.
Caution among investors has tempered volatility. Headline inflation has cooled more quickly than many expected, including consumers, who, a year ago predicted price pressures would be running at a rate of 4.2% at this point compared 3.2% right now, based on the University of Michigan's monthly one-year inflation expectations index.
But other components of the CPI report have proven far stickier. One such gauge, the owners’ equivalent rent — which measures the change in the cost of shelter for homeowners — is at 6.8%, having peaked only in April this year at 8.2%, compared with the peak in the headline at 9.1% in April 2022. Wage growth has slowed, but is still at 4%.
The MSCI All-World index, which is trading around four-month highs, was 0.16% higher. In Europe, the Stoxx 600 held firm while US index futures rose 0.1%-0.2%.
Markets are now pricing in a 48% chance of a rate cut in March compared with 57% a week earlier, according to the CME FedWatch tool. Futures show traders expect at least four quarter-point cuts next year.
Fast and loose
Financial conditions have eased since the Fed met in November and that will most probably influence the central bank’s thinking, analysts said.
“The Fed will feel that it cannot afford to have financial conditions ease further, as that could potentially re-accelerate labour demand and put renewed upward pressure on the rate of consumer inflation,” said Erik Weisman, chief economist and portfolio manager at MFS Investment Management. “Whether the market takes the hint remains to be seen and it is more likely to be driven by the unfolding macro data than Fed jawboning.”
In a busy week for central banks, the European Central Bank, the Bank of England, Norges Bank and the Swiss National Bank all meet on Thursday.
The yield on 10-year treasury notes fell 4.6 basis points to 4.192% after lacklustre three- and 10-year note auctions on Monday.
Investors were reluctant to buy Treasuries at the auctions given thinner liquidity with the inflation data and the Fed meeting due.
The treasury department will sell $21b in 30-year reopened bonds on Tuesday, after Monday’s auction of $50bn in reopened three-year notes and $37b in 10-year notes.
In currency markets, the yen recovered some of the previous day’s losses, which were triggered by a Bloomberg report that cited sources as saying Bank of Japan officials saw little need to exit their negative-rates policy straight away. The yen surged against the dollar last week, driven by brief optimism that a shift could come as early as this month.
The yen strengthened 0.46% to ¥145.51/$r, recouping some of Monday’s 0.8% decline. The central bank meets next week.
The dollar index, which measures the greenback against six others, fell 0.21% to 103.84.
Gold edged higher after touching a three-week low in the previous session and was last 0.2% firmer at $1,985 an ounce.
Reuters
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